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It’s early 2016 and, amid volatile market
conditions, a large superannuation fund
makes a brave move: it awards a $100
million mandate to an emerging markets
manager.
But this isn’t a typical mandate. The fund
and manager are sharing data under a unique
structure and, when they identify their preferred
buy signal, move immediately. The fund grows
more comfortable and boosts its allocation.
Within four months, the mandate passes $1.5
billion.
Welcome to the world of the ‘fund-of-one’
where super funds are creating bespoke portfolios
with their managers to reduce risk and simplify
reporting.
These are just some of the benefits which have
been driving institutional investors to boost their
investments in fund-of-one structures over the
past six years.
BUILDING THE HOME BASE: SUPPORT FOR
THE FUND-OF-ONE
Australia is home to 16 of the largest 300 funds in
the world, according to a 2015 survey by (Willis)
Towers Watson and Pensions & Investments.
With this size comes enormous economies of
scale. Funds are using it to exert more control
as they increasingly turn to offshore investments
to boost returns while adding new alternative
strategies to diversify their portfolios.
It represents an opportunity but one that is
also accompanied by greater complexity and risk.
Funds can structure their investments to manage
this in multiple ways.
One is to ensure their offshore investments are
domiciled in Australia, which offers economies
of scale and diversification of risk. It allows super
funds to collectively benefit from the investment
expertise of a fund manager while also enjoying
the relative simplicity of Australian tax, compliance
and reporting standards.
For example, the reporting requirements of
offshore investments housed in an Australian-
domiciled fund are automatically aligned with
our 30 June fiscal year and must meet the
standards of local regulators such as APRA and
ASIC. Compliance requirements clearly fall under
Australia’s well-respected rule of law rather than a
range of offshore jurisdictions.
An Australian-domicile ultimately improves back
office functioning – efficiencies which can flow
into return-generating investment decisions.
An emerging market investment housed in
an Australian-domiciled fund for example, can
immediately include sub-accounts for regions
where it can take months of bureaucracy to be
approved as a foreign investor, such as India or
Taiwan. Once those sub-accounts are set up,
the manager can quickly move on potential
investments in those regions while the investor
continues to benefit from seamless reporting and
a single unit price.
A COMMINGLED FUND VERSUS THE FUND-
OF-ONE
The benefits of an Australian-domicile can be
obtained in a commingled fund, where an
investor’s assets are pooled alongside other
investors. However, a fund-of-one—where a
single investor invests in and controls the fund
through an investor registered (or unregistered)
vehicle—improves the risk-return dynamics again.
This is because a super fund using a fund-
of-one naturally has more power to negotiate
investment terms and create a bespoke portfolio
with their chosen fund manager across areas such
as fees, investment flexibility, transparency and
reporting standards.
The sole investor can negotiate investment
terms with the fund manager rather than
accept ‘middle-of-the-road’ mandate terms in a
commingled fund which are designed to suit a
range of investors.
Funds can negotiate lower fees dependent on
the size of the deal (typical fund-of-ones range in
size from $50–$200 million although a number
are greater than $1 billion). Particular assets or
investment strategies, such as the use of gearing
or derivatives, can be easily segregated from the
fund manager’s wider offering.
In this way, the structure quarantines and
reduces risk, while delivering better reporting and
transparency about the underlying investment
strategy. The fund-of-one’s independent trustee
acts as an additional safeguard, monitoring the
custodian, administrator, auditors and fund
manager.
The risk management benefits of the fund-
of-one structure can also flow into its ability to
deliver potentially higher net returns.
For example, the investor and fund manager
Superfunds November 2016